Major bank slams FSI's ‘level playing field’ recommendation

By James Mitchell

07 April 2015

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A major lender has argued that raising mortgage risk weights to narrow the difference between IRB-accredited banks and those using standardised risk weights would not level the playing field of the Australian mortgage market.

In its third and final submission to the Financial System Inquiry (FSI), ANZ notes that the primary rationale for the recommendation to narrow the perceived gap between IRB and Standardised RWA on mortgages is for reasons of competition, despite the recommendation appearing in the final report’s chapter on resilience.

“In ANZ’s view, it is not appropriate to use capital settings to deal with a perceived competition issue,” the bank said.

“The Australian mortgage market is already intensely competitive, as noted by the Reserve Bank of Australia.”

According to ANZ, applying a higher capital charge to an IRB bank for mortgages will not affect the competitive position of other ADIs.

Rather, the major bank argues that the “inferior position” of ADIs using standardised risk weights is driven by inefficiencies, including higher cost to income ratios, a lack of business and geographic diversification, and other factors associated with higher risk which impact access to funding.

“This is in turn reflected in their lower ROE rather than an inability to compete for customer business,” the bank said.

“In fact, requiring the major ADIs to increase capital further will increase wholesale debt investors’ preference to invest in the larger ADIs rather than smaller ADIs using standardised risk weights.”

ANZ’s line is in stark contrast to that of the regional banks, who have called on the federal government to immediately repair the framework that they believe allows the big banks huge advantages in risk weighting their home loans.

In their final joint submission to the FSI, Suncorp Bank, ME Bank, BOQ and Bendigo and Adelaide Bank reinforced the issues they believe need to be addressed to support a healthy, multi-tiered banking system.

The four regional banks have insisted an inequitable regulatory capital framework is giving some banks a huge advantage in the risk-weighting of home loans.

The joint submission strongly supports the inquiry’s recommendation for an average advanced housing risk weight of between 25 per cent and 30 per cent on ‘advanced’ banks and would like to see its implementation expedited for the benefit of Australian consumers.

Suncorp Bank CEO John Nesbitt asked for bipartisan support for Mr Murray’s recommendations, which he said go to the heart of competitive neutrality.

“The report recommends a 25 per cent to 30 per cent average mortgage risk weight be applied for those banks with advanced accreditation,” Mr Nesbitt said.

“This would simply narrow the gap between the capital held by smaller and larger banks over like-for-like mortgage portfolios.

“This will allow Australian consumers to benefit from a fairer, healthier, multi-tiered banking system well into the future.”

All four regionals welcomed APRA chairman Wayne Byres’ recent comments indicating a preparedness to potentially move ahead of international regulators in relation to capital requirements and urged the federal government to implement the FSI’s key recommendations without delay.